Organizations that work together
naturally share information to maintain their business operations. Keller and
Yeaple (2013) discuss the transactional costs associated with embodied (traded
intermediates) and disembodied information (direct communication). Their
research has implications for multinational firms that require efficient use of
information and product transferrence to compete on the global market. Their
model provides two ways of analyzing how increased distance reduces sales and
why changing technology may influence the dynamics of trade.
Modern advances in
telecommunications have positively affected the ability to maintain homeostasis
with market trends. Those organizations that engage in research-intensive
products rely on information transference
to develop quality products that are well received in the market. The ease of
information transference in either embodied or disembodied form impact the strength
of operations of multinational firms.
For example, the farther away the sales outlet from the
manufacturing organization, the less sales made. This trend appears to have
similarities with the information transference throughout the economic chain
and the inefficiencies created by increased spatial distance. As improvements in
logics and communication capabilities increase there is likely to be a
reduction in cost and decision lag time.
As all decisions are from knowledge, all products are built
on knowledge, all sales are based on knowledge and therefore the distance
between two entities and the method of information transference will naturally
have an impact on sales and profits. Just as the communication level between
executives, managers, employees, and customers is important for proper business
development the strength of communication across geographically dispersed areas
is also important.
The researchers used firm-level data of the international
structure of U.S. multinational operations from the Bureau of Economic Analysis.
A multinational firm was considered a U.S. legal entity that made direct
investment in at least one foreign business. The total survey included 1,000
U.S. multinationals and 3,000 affiliates from 48 distinct industries. They observed total R&D expenditures by
year and by industry. This helped them determine a ratio of R&D
expenditures to sales.
Their analysis found that cost of transfer varied with the
knowledge intensity and the destination. For each leg, and organizations gravitated
toward those methods that reduced costs as much as possible. As disembodied
knowledge costs are fixed, firms choose this method to maximize efficiency. As
distance between entities grows, so does the knowledge intensity and the
general costs associated with that knowledge.
The research is important in the sense that distance and
trade costs should not be viewed only in physical terms. Such trade costs
should also take into account the general cost of knowledge transference between
countries and cultures. As the distance between the home country and the
subsidiary increases so does the general costs on multiple fronts. Likewise, as
international shipping costs and information costs decline, economic activity
is likely to increase due to improved sales opportunities. Those companies that
integrate new communication technologies and knowledge are likely to have
longer reaches for products/services and sales.
Kellery, W. & Yeapler, S.
(2013). The gravity of knowledge. American Economic Review, 103 (4).
